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BOLI Growth Continues: Latest Trends in Bank-Owned Life Insurance

By: David Shoemaker, Ken Derks | July 23rd, 2014

Banks and, particularly, community banks, continued to increase their purchases of bank-owned life insurance policies (BOLl) in 2013. Banks are taking advantage of attractive BOLl yields compared to alternative investments, and they are motivated as well by increased liquidity and low interest rates. BOLl provides tax advantaged investment income not available with traditional bank investments. Banks earn income from the growth of the BOLl cash value and from the life insurance proceeds paid to the bank on the death of the insured employee. In addition, BOLl can help offset and recover employee benefit expenses.

Industry Studies

Each year, IBIS Associates, Inc., an independent market research firm, publishes a report analyzing BOLl sales based on information obtained from the insurance companies that market BOLl products. According to the most recent IBIS Associates BOLl Report:

  • Life insurance companies reported that they sold 1,235 new BOll cases in 2013, up 12 percent from 2012, representing about $3.18 billion in premium in 2013. The 1,235 cases included banks purchasing BOLl for the first time as well as additional purchases by banks that already own BOLl.
  • Of the $3.18 billion in premium sold last year, 59.6 percent was put into general account, 31.8 percent was put into hybrid separate account and 8.6 percent was put into variable separate account.
  • The average premium per case was about $2.57 million, a 20 percent increase from last year.
  • Banks with assets of $250 million to $1 billion purchased the largest number of products last year (42.3 percent of cases).

Based on a review of FDIC data, the Equias Alliance/Michael White Bank-Owned Life Insurance Holdings Report published in 2014 for the year 2013 shows that:

  • Of the 6,812 banking institutions in the U.S., 3,840 or 56.4 percent held BOll assets in 2013. However, if you exclude banks with less than $100 million in assets from the equation, the percentage of banks holding BOLl jumps to 64.9 percent.
  • BOLl assets totaled $143.84 billion at the end of last year, reflecting a 4.3 percent increase from $137.95 billion at the end of 2012. However, banks with between $100 million and $10 billion in assets had an increase of 7.8 percent in their BOLl assets from 2012 to 2013.
  • The fastest growing plan type in 2013 was hybrid separate account (which combines many of the best features of a general account and variable separate account product). Almost 1,200 or 30.9 percent of the 3,B40 institutions reporting BOLl assets held all or part of their funds in the hybrid separate account. Assets in this type of account grew 9.1 percent from 2012 to 2013 while general account assets grew 6.1 percent during that same time and variable separate account assets increased only 1.9 percent.
  • Although the largest portion of BOLl assets was held in variable separate account polices (49 percent of total BOLl assets), this plan type was used by the fewest number of banks. The bank bears the investment risk under this type of plan rather than the insurance company. Further, the number of banks holding variable separate account BOll assets increased only slightly from 593 at the end of 2012 to 597 at the end of 2013.
Current BOLl Net Yields

BOLl provides a competitive net yield, currently in the range of 3.0 percent to 3.9 percent after all expenses are deducted, depending on the carrier and product. This translates into a tax equivalent yield of 4.B4 percent to 6.29 percent, assuming a 3B percent tax rate. Carriers can reset crediting rates annually or quarterly depending on the type of BOLl product used.

In summary, the number of banks purchasing BOLl continues to grow. The tax-deferred interest generated by a fixed income BOLl policy is typically substantially higher than a bank can earn on other investments with a similar risk profile, especially in the current rate environment. Further, income generated by BOLl can help offset the ever increasing costs of a bank's health care, retirement and other benefit programs.

Equias Alliance offers securities through ProEquities, Inc. member FINRA & SIPC. Equias Alliance is independent of ProEquities, Inc.

David Shoemaker, CPA/PFS, CFP®, is a principal of Equias Alliance, which through consultants has assisted over 800 banks in the design of nonqualified benefit plans, performance based compensation and (BOll). To learn more, contact David Shoemaker at 901-754-4924 or dshoemaker@equiasalliance.com.

Ken Derks is a principal of Equias Alliance, which through consultants has assisted over 800 banks in the design of nonqualified benefit plans, performance based compensation and (BOLl). To learn more, contact Ken Derks at 469-252-1037 or kderks@equiasalliance.com.

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